Bill Jamieson: Chasing the next spending bubble

BILL JAMIESON

Is the UK economy on the road to recovery, or just taking a detour back to where the crisis first began, asks Bill Jamieson

After three years of “austerity” are we reaping the benefits at last? Or has Chancellor George Osborne set us off on yet another game of “Chase the Bubble”? Expect this to emerge as a major battleground in the party conference season. The government will argue that budget constraint (it can hardly be called austerity) has paid off. Critics will claim households have been put through the ringer for no real benefit and that the coalition, weary of the rhetoric of cutback with an election on the horizon, is now unleashing another short-term borrowing and spending bubble.

For most Scots, it is the maintenance of recovery that matters, whatever the circumstances that produce it. Encouraging news keeps flowing. Manufacturing expanded for a fifth successive month in August – and at the fastest rate since February 2011. Construction is up at a six-year high. And figures from the beleaguered retail sector show sales values rose by a robust 3.6 per cent year on year in August, similar to the 3.9 per cent year-on-year gain achieved in July. Mortgage lending continues to climb. Employment is at record levels. Are we not now embarked on that long-elusive goal – strong and sustained growth?

But scepticism abounds. It is not just experience in the UK that fuels these doubts. Other countries, including the US, have been showing signs of a robust recovery without, it seems, having been put through an austerity ringer.

And the doubts are not confined to “the usual suspects”. Writing in the Financial Times this week, Trevor Greetham, investment guru at Fidelity Worldwide Investment, says that with an election looming in 2015, “the government has lost patience with talk of living within one’s means” and that Osborne has “unleashed the beast, tempting consumers to leverage their balance sheets into a new housing bubble”.

Different countries responded in very different ways to the financial crisis. “America’s decision to keep both fiscal and monetary policy as loose as possible has allowed its economy to recover and pay down debt. Measures of US economic activity exceeded their 2008 levels two years ago, the budget deficit is down by a half, consumers are paying down debt and the recovery is sufficiently entrenched for the Federal Reserve to rattle the markets with talk of withdrawing stimulus.”

Contrast this with the UK, which focused on the high level of government debt in the aftermath of the crisis. Interest rates were slashed, but the authorities raised taxes and cut spending into the recession. “Front-loaded austerity failed to trigger the spontaneous private sector recovery its advocates expected and all the countries following this path have seen output remain substantially below pre-crisis levels.”

It was in America that the financial crisis originated and which brought trauma to its housing market. But it has recovered in many areas and GDP notched up 2.5 per cent growth in the second quarter of the year over the previous quarter, signally better than our own performance. So does the US have lessons for us? I was intrigued to read the account of economist Douglas McWilliams, head of the Centre for Economics and Business Research, just returned from a five-week fact finding tour of the US, travelling from east to west on a 7,000 mile odyssey covering 20 states.

He found a divided country – “almost as if we had visited two parallel universes” – though perhaps not in the way most imagine. In New York and Washington, the politicians were downbeat. In the rest of the country, he met with people in “real” jobs in business “or faced with the problems of making ends meet on retirement incomes that, however generous they had once looked, seemed less so in a world of low yields and higher prices”.

The “real” people sounded more capable than the politicians of rising to the challenge. “But those with least confidence were young people, who sensed that life would have fewer easy opportunities for them than for their parents.”

His key findings were that the US economy is in much better shape than it appears: US GDP, he believes, will be 4.8 per cent above its pre-recession peak by the year-end, whereas UK GDP will still be some 2 per cent lower. That would suggest that the Keynesian critics are right: the US did not seem to experience the scale of the austerity squeeze that Osborne imposed on the UK. But according to OECD data, the US has made a 6.2 per cent improvement in its budget balance since 2009 – much larger than the UK’s 3.9 per cent adjustment. The US squeeze this year is particularly marked. The US has undergone a squeeze – yet has still emerged with a robust economic performance.

America’s economy has a famous ability to bounce back from adversity – tax revenues have rebounded 14 per cent in the past year. What is particularly striking is the strength of business investment. While real investment here is still languishing – more than 10 per cent down on its pre-recession peak – the OECD forecasts US investment will hit a new record next year.

New-technology investment is to the fore. US auto maker Tesla has strong equity backing for making electric cars, while Amazon is investing $14 billion (£9bn) in state-of-the-art warehouses. Annual venture capital deals are running at 3,800 a year and US companies are raising between $25bn and $30bn a year in venture capital. These are levels that we can only dream of in the UK. And there is a record level of investment in low-cost, non-traditional energy, particularly fracking. All this, McWilliams concedes, still leaves America wrestling with high levels of long-term unemployment and hard-edged welfare budget reductions at state level. And political divisions are wide and fiercely argued. But it looks, in many respects, in a healthier position than in the UK, where the next phase of recovery is set to be led by a housing boom and a tacit encouragement to households to take on more borrowing. Household debt still stands at 140 per cent of income and in the first three months of this year households saved just 4.2 per cent of their income, the lowest since 2009.

We cannot say “austerity” has worked when we’re encouraged to take on more cheap debt – and when markets sense interest rates won’t stay low for long. Is this really the recovery road – or a long loop back to just where we started?